The Joy of Sachs
By Paul Krugman
Published: July 16, 2009
The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?
First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.
Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.
Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.
Let’s start by talking about how Goldman makes money.
Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.
Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers.
Goldman’s role in the financialization of America was similar to that of other players, except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.
And Wall Streeters have every incentive to keep playing that kind of game.
The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.
And the events of the past year have skewed those incentives even more, by putting taxpayers as well as investors on the hook if things go wrong.
I won’t try to parse the competing claims about how much direct benefit Goldman received from recent financial bailouts, especially the government’s assumption of A.I.G.’s liabilities. What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong.
You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.
Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.
If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole.
The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to precrisis levels. But it’s bad news for almost everyone else.
Well yeah.
But I'll go with Stirling Newberry here. This goes way beyond a little indulgence for some lobbyists who'll pad your campaign nest. It's Homeland inSecurity:
...This is hard to say, hard to read, and hard as a diamond. It is the one true thing: America now, morally, is at a point as low as the era of chattel slavery, in that it is willing to destroy the lives of millions, in order to have one more day, week, month, year, or decade, of fast food, fast cars, and fast bucks. But it is what history will write about this era: that it was a pathetic moment. We stand sticking ribbon stickers on the back of the huge SUV that is Bush's version of America. But we have not scrapped it, we will not, and we cannot yet.
The Progressive movement is, increasingly, divided between the paid capitulationist and the outsider idealist. The political wing of the movement sells FAIL by the bucket. Their reality -- "We're fails! We're snails! Get used to it!" -- is incrementalism and careerism. But the idealists are no better, even though I am certainly to be numbered among them. There is no one in America who is more than a stone's throw away from one of the following: the military, the land casino, or the global warming enterprise. Every day and every dollar is smeared with the blood of those who will starve, drown, or die, in the future we are making. The idealist will not bend his knees, to compromise, but must bend his or her knees, to enterprise. It is merely one's choice of chains that is at issue.
...The coalition of catastrophe is already forming: a resurgent neo-Hooverism, which hopes to have borrowed enough to bail out the financial system, but not pay taxes to pay it back, is already gathering. This catastrophe coalition wants to burn carbon fuels, save the banks, and hope for one more land boom. Obama's economy is Bush's economy with muscular dystrophy: a war, a financial bubble based on cheap dollars for banks, attracting foreign credit, and the prayer for another land boom. Energy and stimulus have already been massive FAILs, and it is going to be joined by domestic labor law.
The promise of hope is less visible, simply because it has no billionaires backing it. That promise is that after the torrential wash of the Republican swing that will follow Obama's time in power, be it 4 or 8 years, America will be faced with a very stark choice. China's patience is not forever: When they can make cars and have built enough roads, they will open their domestic demand. They are using this economic crisis the way FDR did: to develop for the future. They are building the equivalent of their interstate highway system. This crisis is the compression stroke of an engine that will expand. Already global growth, and global resource inflation, are driven from China.
...That the coalition of catastrophe is gathering, preaching burn and churn as its new policy -- burn carbon, churn land --- is evident to anyone who can read Dick Morris' new book, or watch MSNBC. Hooverism hovers close. Don't believe me, believe Paul Krugman.
So what is now? What is now is to realize that the fix is in, your leaders are selling you out, and they will present the dregs of capitulation, mixed with little real compromise, and some sparse victories, as great and sweeping. There is tremendous pressure to lie and say otherwise. I will not.
Could things have been different? Perhaps. Could they be different now? Yes, but only in the abstract sense. That the leadership of the Democratic Party and the Progressive Movement are ready, willing, and eager, to sell out is not invisible to the Republicans. The right knows that if they leave a narrow gap, that the Democrats and Progressives will rush through it, and be slaughtered politically. The right is at a low ebb, its ideology discredited, its powerful financial backers -- temporarily -- coopted, its public figures so clearly third and fourth generation. A muscular left would spend this moment to shatter and remake the American consensus. But that is not what is being done. The only people the leadership of the left can bully are members of the left. They have no problem with that...
Chaos is the plan.
Still. Sustainably. There will not be uncontrolled unprofitable disaster. There will be no unprofitable transformation or salvation. There will be mass media manipulation of the public, and the system will be maintained.
Stirling, years ago you wrote something I'd link to except it no longer exists on the original site- but I kept it anyway (Fair Use and all that- I am a totally not-for-profit organization):
...There are three basic pillars of constitutional order: the mandate of the government, the meaning which binds the people and the government together, and the mechanism by which the government pursues the mandate given to it by the people. Of the various mechanisms, money is the most important, though not in the crude sense merely of who gets money, but how money works, how it is created. Money determines, to no small extent, the incentives and range of actions that an individual has available to him.
The New Deal instituted a new kind of money, money based on assets that banks could show on their books, and backed by the Federal Reserve and deposit insurance. One of the key programs that the New Deal used to make this new kind of money work was Social Security. This money replaced the gold-backed money of the previous constitutional order, and changed, fundamentally, the way America worked as a nation. The mandate of the government was to balance the economy; the meaning was based on consensus for action; if there was a problem, or even a potential problem, then the public sense was that it had to be met head on.
Karl Rove has, more than any other single political operative, been responsible for designing a means of attacking that political order, and he has, in no small measure, accomplished this. Gone is the great spirit of bi-partisanship that dominated government from the chaotic early days of 1933 when "we weren't Democrats or Republicans, just Americans trying to save the banking system," in the words of one treasury official.
This cycle of American constitutional change, in which financial crisis leads, first, to a reactionary attempt to force the old system to work, has been seen three times before. Before the Constitution of 1787 was the financial crisis of the 1780s and the Articles of Confederation. Before the Civil War was a massive financial panic, and the infamous Dredd Scott decision, which overturned the Compromise of 1850, and opened the Great Plains to slavery. And before FDR were Hoover's futile attempts to save the gold standard and a government which was less involved in the economy than in religion.
This reactionary order has always failed in the past, because it must consume every cent of the economy. That is its nature: it is an attempt to preserve rent, which is any economic advantage that comes from position in time or space, even if it must sink the entire national surplus in the attempt. This is why the Republicans must borrow to effectively abolish Social Security; Rove knows that in order to secure Republican domination for a generation or more, he must place a weight on the back of government so heavy that no one can remove it. Should a Democrat manage to take the White House, then all that need happen is that a Republican Congress stop doing the behind-the-scenes juggling that keeps the economy going, a recession will ensue, and the Oval office will return to Republican control...
Except Karl wasn't the mastermind- he was (and is) just another puppet the Hand wears sometimes. I think Karl and Dick and Rummy all forgot they weren't the Masters of the Universe. The real Masters- well, I think we're all getting closer to seeing who they are. We certainly see what they are.
They aren't Republicans, they aren't Democrats, they aren't Liberals, they aren't Conservatives. But their goal remains the same as it ever was.
A post-industrial neo feudal order once the oil is gone.
And until it is, the Company is doing a great job of staying on top.
No comments:
Post a Comment